India-China Rivalry Threatens US Sanctions On Iran

As Andrew Detsch reported last week, before leaving for August recess, the U.S. House of Representatives passed a new sanctions bill against Iran, which will become law if the Senate also passes it and the president signs it.

Many have criticized the House for wanting to enact more sanctions before the U.S. and its allies have held diplomatic talks with Iran’s new administration. In the Wall Street Journal yesterday, two Congressmen, a Republican and Democratic, defended their institution’s actions by arguing that only by “bringing the [Iranian] regime to the verge of economic collapse” can the U.S. force “Iran to comply with all international obligations, including suspending all enrichment-related and reprocessing activities.”

Even as U.S. lawmakers try to ramp up sanctions against Iran’s oil exports, the existing Western sanctions campaign has come under threat from a geopolitical force not previously part of the equation: China and India’s strategic rivalry.

Previously, avoiding an oil shortage on the global market was the main factor Western nations had to contend with in implementing sanctions against Iran’s oil industry. The initial U.S. legislation, for example, gave the president enough flexibility in implementing the sanctions to ensure that taking Iranian crude off the market would not cause a significant spike in the price of oil worldwide. Additionally, by allowing the president to issue waivers to specific countries that continuously reduced their Iranian crude imports, the sanctions legislation allowed the U.S. to avoid significantly impacting key bilateral relationships.

So far, then, the West has been successful at implementing the sanctions. The U.S. and EU have managed to drastically reduce Iran’s oil exports without rattling oil markets. This is partly due to the inherent flexibility of the sanctions, but a number of exogenous factors have been equally important, such as the increased supplies from Arab countries and North America, and reduced demand in emerging markets in Asia.

But managing the balancing act between reducing Iran’s exports without causing oil shortages is primarily an economic endeavor. Although many countries protested the unilateral nature of the sanctions, Iran’s oil customers were not willing to risk the ire of the U.S. and EU as long as they were able to find other sources of supply.

But geopolitics is a much more zero-sum game, and it now appears to be entering into the Iranian oil equation in a big way.

For example, the deterioration in U.S.-Russian relations is likely to reduce pressure on Iran. Although Russia benefits economically from the loss of Iranian oil and natural gas on the global market, the Kremlin has long used Iran as a pawn in its dealings with the U.S. Specifically, it has held out its relative cooperation or resistance on Iran as a bargaining chip on its other dealings with the West. With the deterioration of U.S.-Russian relations, President Vladimir Putin is likely to strengthen engagement with Iran if only to demonstrate Moscow’s leverage with the U.S. Indeed, Putin was contemplating a visit to Iran this month but instead with meet with Iranian President Hassan Rouhani next month on the sidelines of the Shanghai Cooperation Organization.

Far more importantly, Chinese-Indian competition over the Indian Ocean and Middle East is likely to threaten the West’s ability to maintain oil sanctions against Iran. The International Energy Agency (IEA) noted in a report last week that Iran’s oil exports rebounded considerably in July from the month before. According to the IEA’s preliminary data, most of this increase came from China, which purchased an average of 660,000 barrels of oil per day from Iran in July, compared to 385,000 bpd in June.

The IEA report further noted that Iran’s has been expanding the size of its tanker fleet, with much of the new tankers coming from China. This should pave the way for increased Iranian crude sales to China in the months ahead.

While the IEA’s data found that India did not purchase any Iranian crude in the month of July, this is merely a temporary lapse. Indeed, on Monday India’s Finance Minister, P. Chidambaram, told reporters that Delhi may expand imports from Iran within the bounds set by the UN Security Council sanctions against Tehran. This announcement follows weeks of diplomatic visits between India and Iran, as well as a new deal whereby India will use rupees to purchase Iranian crude.

Although India is motivated in part by economic considerations, geopolitics is almost certainly the driving factor. As previously reported, China recently offered to finance upgrades to the Iranian port at Chabahar, a project that India has long been invested in.

This revelation caused a panic in Delhi. And for good reason: Iran is the last country standing between China’s Gwadar Port in Pakistan and its main oil suppliers in the Middle East. If China is able to wrest Iran from India’s sphere of influence, and gain access to its ports along the Persian Gulf, Delhi will be in an even weaker position in trying to exploit Beijing’s reliance on foreign oil supplies. India’s ability to influence events in Afghanistan—which is of growing concern to Delhi as the NATO-led mission in Kabul winds down—will also be severely undercut if China is able to displace India in Iran.

With so much at stake in this zero-sum environment, India and China are likely to be willing to gamble more on trade with Iran, while hoping that the U.S. does not impose significant sanctions against their countries for fear of retaliatory measures.